ECONOMIC DEVELOPMENT AND GROWTH


Introduction
In recent years, there has come into existence a new branch of economics
known as the "Economics of Development". It refers to the problems of
the economic development of underdeveloped or backward countries. In
addition to the illuminating reports of the U.N.O. on the subject, some topranking
economists like Nurkse, Dobb, Staley, Buchanan, Rostow and Ellis
have made some original contributions to the Economics of Development. The
main reason for the growing popularity of "Economics of Development" as a
separate branch of economic theory is the increasing tendency on the part of
the newly independent countries of Asia and Africa to resort to developmental
planning as a means to eliminate their age-old poverty and raise living standards.
Meaning of Economic Development
Economic development is a process whereby an economy's real national
income as well as per capita income increases over a long period of time.
Here, the process implies the impact of certain forces which operate over a
long period and embody changes in dynamic elements. It contains changes in
resource supplies, in the rate of capital formation, in demographic composition,
in technology, skills and efficiency, in institutional and organisational set-up. It
also implies respective changes in the structure of demand for goods, in the
level and pattern of income distribution, in size and composition of population,
in consumption habits and living standards, and in the pattern of social
relationships and religious dogmas, ideas and institutions. In short, economic
development is a process consisting of a long chain of inter-related changes in
fundamental factors of supply and in the structure of demand, leading to a rise
in the net national product of a country in the long run.
Definitions of Economic Development
The term 'economic development' is generally used in many other
synonymous terms such as economic growth, economic welfare, secular change,
2 Development and Environmental Economics
social justice and economic progress. As such, it is not easy to give any precise
and clear definition of economic development. But in view of its scientific
study and its popularity, a working definition of the term seems to be quite
essential.
Economic development, as it is now generally understood, includes the
development of agriculture, industry, trade, transport, means of irrigation, power
resources, etc. It, thus, indicates a process of development. The sectoral
improvement is the part of the process of development which refers to the
economic development. Broadly speaking, economic development has been
defined in different ways and as such it is difficult to locate any single definition
which may be regarded entirely satisfactory.
1. Prof. Meier and Baldwin
According to Prof. Meier and Baldwin; "Economic development is a
process whereby an economy's real national income increases over a long
period of time".
This definition explains three ingredients of economic development. a)
process, b) real national income, c) long period. The discussion of these three
factors would help in understanding the concept of economic development.
a) Process
The term 'process' here refers to the operation of certain forces which
bring about changes in certain variables. Various types of economic changes
take place during the development process. The most important of these changes
can be broadly divided into two categories;
i) changes in the supply of fundamental factors, and
ii) changes in the structure of demand for the products.
Changes in factor supply take place due to discovery of additional
resources, capital accumulation, population growth, adoption of better techniques
of production and institutional changes. Again, changes in the structure of
demand for products take place due to changes in the size and composition of
the people, changes in the level and distribution of income, changes in tastes
etc. Hence economic development may be defined as development of factor,
supplies and product demand. These changes bring about an increase in real
national income over a long period.
b) Real National Income
Other things being equal, there is a positive correlation between the real
national income and economic development. Higher real national income of a
country is considered an index of higher economic development and vice versa.
In brief, we can say that the real national income is the measuring rod of
economic development. Though it may be an imperfect method for measuring
Economic Development and Growth 3
development, it is, however, used for global development comparisons. Here
emphasis is on the word "real" which signifies that purchasing power of national
income should be taken into account for quantifying development. In other
words, the money national income is to be discounted by the price index, as
shown by the formula below:
Yr =
Y
P
m
Where, Yr = Real national income
Ym = Money national income
P = Price index
The formula signifies that development can be meaningful if an increase
in money national income is not accompanied by increase in price level. It
implies that price stability is an essential condition for promoting development.
Thus, economic development signifies higher real national income.
c) Long Period
Economic development refers to an upward trend in real national output
over a long period. "Although the upward trend means that each successive
cyclical peak and trough is generally at a higher level of real national output
than the preceding peak and trough respectively, it is the increase in real national
income between cycles rather than the increase within a cycle that denotes
development". Since a major business cycle covers normally 6 to 13 years,
long term process here refers to a sustained increase in real output over a
period of at least 25 years.
Thus, economic development is a process consisting of a long chain of
interconnected changes in fundamental factor supplies and in the structure of
demand for products leading to a rise in real national income over a long period.
2. Benard Okun and Richard W. Richardson
According to Benard Okun and Richard W, Richardson, "Economic
development may be defined as a sustained secular improvement in well being,
which may be considered to be reflected in an increasing flow of goods and
services".
A close examination of this definition reveals that it is more or less similar
to the concept of development as explained by G.M. Meier. According to this
definition, economic development implies continuous secular increase in national
output for promoting material welfare of the society. It stresses on three
important aspects of development; a) Economic development is a dynamic
and long term phenomenon; b) It implies improvement in material welfare and
c) National output is the measuring rod of material welfare.
4 Development and Environmental Economics
This definition is not regarded satisfactory as it fails to explain the role of
social, political, institutional and international forces. These forces are considered
vital as they shape and direct the global economic development. So this definition
leaves much to be desired.
3. Profs. Baran, Bachanan and Ellis
Some economists like Profs. Baran, Buchanan and Ellis interpret economic
development as something more than merely an increase in total output; they
believe that it should also denote a rising standard of living. They define
economic development as a process whereby the total per capita income or
output of a country increases over the long period.
a) Prof. Baran says, "Let economic growth or development be defined
as an increase over time in per capital output of material goods."
b) In the words of Profs. Bachanan and Ellis; "Development means
developing the real income potentialities of the under-developed areas by using
investment to effect those changes and to argument those productive resources
which promise to raise real income per person".
In board terms, it implies that in a developing economy.
ΔYr > ΔP
resulting in an increase in per capita income.
Here,
Δ = refers to increase,
Yr = to real national income and
P = to size of population.
In other words, for economic development the rate of increase real income
should be higher than the rate of population growth.
4. Prof. Colin Clark
Prof. Colin Clark defines economic development from the angle of
economic welfare. In his own words, "Economic progress can be defined
simply as an improvement in economic welfare." Economic welfare, following
Pigou, can be defined in the first instance as an abundance of all those goods
and services which are customarily exchanged for money. Leisure is an element
in economic welfare and more precisely: "We can define economic progress
as the attaining of an increasing output of those goods and services for a
minimum expenditure of effort, and of other scarce resources, both natural
and artificial".
5. United Nations Expert Committee
According to this Committee, "Development concerns not only man's
material needs but also the improvement of the social condition of his life.
Economic Development and Growth 5
Development is, therefore, not only economic growth, but growth plus change–
social, cultural and institutional as well as economic". This definition
encompasses economic and non-economic aspects of development. This
definition stresses on the expansion of development variables, and also improving
the quality of those variables. For example, capital is a development variable.
Not only the increased quantity of capital is needed but the improvement in its
productivity is also required for development. Similar instances can be given in
respect of other development variables. The central point of this definition is
that quantitative and qualitative changes in development variables are considered
essential ingredients of economic development.
6. Comprehensive Definition
In the end we may give a simple but comprehensive definition of economic
development which runs as, "Economic development is a continuous process
which has to be extended over a long period of time so as to break the vicious
circle of poverty and lead a country to a stage of self-sustaining growth or to
self-generating economy".
Thus, we can conclude that economic development is a process rather
than the result of it which results in a rise in real national income, and the net
national product must have a sustained increase i.e., it must be over a long
period of time.
Characteristics of an Developed Economy
A developed economy is the characterised by increase in capital
resources, improvement in efficiency of labour, better organisation of production
in all spheres, development of means of transport and communication, growth
of banks and other financial institutions, urbanisation and a rise in the level of
living, improvement in the standards of education and expectation of life, greater
leisure and more recreation facilities and the widening of the mental horizon of
the people, and so on. In short, economic development must break the poverty
barrier or the vicious circle and bring into being a self-generating economy so
that economic growth becomes self-sustained.
The main characteristics of developed countries are as follows.
1. Significance of Industrial Sector.
2. High Rate of Capital Formation.
3. Use of High Production Techniques and Skills.
4. Low Growth of Population.
These are discussed in below.
1. Significance of Industrial Sector
Most of the developed countries in the world have given much importance
of the development of industrial sector. They have large capacities to utilise all
6 Development and Environmental Economics
resources of production, to maximise national income and to provide
employment for the jobless people. As we are quite aware that these countries
receive the major portion of their national income from the non-agriculture
sectors which include industry, trade, transport, and communication. For instance,
England generally receives nearly 50% of her national income from industrial
sector, 21% from transport and commerce, 4% from agriculture and 25%
from other sectors. The same case is with the U.S.A., Japan and other West
European countries. But in India and other developing countries agriculture
contributes, say, 35 to 40 percent, to their national income.
2. High Rate of Capital Formation
Developed countries are generally very rich, as they maintain a high level
of savings and investment, with the result that they have huge amount of capital
stocks. The rate of investment constitutes 20 to 25 percent of the total national
income. The rate of capital formation in these countries is also very high.
Besides this, well-developed capital market, high level of savings, broader
business prospects and capable entrepreneurship have led to a high growth of
capital formation in these economies.
3. Use of High Production Techniques and Skills
High production techniques and skills have become an essential part of
economic development process in the developed countries. The new techniques
have been used for the exploitation of the physical human resources. These
countries have, therefore, been giving priority to the scientific research, so as
to improve and evolve the new and technique of production. Consequently,
these countries find themselves able to produce goods and services of a better
equality comparatively at the lesser cost. It is because of the use of high
production techniques and latest skills, that the countries like Japan, Germany
and Israel could have developed their economies very rapidly, though they
have limited natural resources.
4. Low Growth of Population
The developed countries, like the U.S.A., the U.K. and other Western
European countries have low growth of population because they have low
level of birth rate followed by low level of death rate. Good health conditions,
high degree of education and high level of consumption of the people have led
to maintain low growth of population followed by low level of birth and death
rates. The life expectancy in these countries is also very high. The high rate of
capital formation on the one hand and low growth of population have resulted
in high level of per capita income and prosperity in these countries. Consequently,
the people in these countries enjoy a higher standard of living and work together
unitedly for more rapid economic and industrial development of the nations.
Besides this, the entire society, its structure and values are found to be
Economic Development and Growth 7
dedicated to the goal of rapid economic and industrial development. The position
of individuals in the society is decided by the ability of the persons and not by
their birth, caste or creed. Dignity of labour is maintained. The economic motive
and strong desire to lead a better social life always inspire people to contribute
to the process of development. The main objective of rapid economic
development, particularly in the developed economies is to achieve the level of
stagnant economic growth, so that they may maintain the existing economic
status and exercise control over business cycle.
Distinction Between Developed and Underdeveloped Economies
We may now distinguish between the features of an underdeveloped
economy from that of developed one as follows;
1. Underdeveloped economies are distinguished from developed
economies on the basis of per capita income. In general, those countries which
have real per capita incomes less than a quarter of the per capita income of
the United States, or roughly less than 5000 dollars per year, are categorised
as under-developed countries.
2. An underdeveloped economy, compared with an advanced economy,
is underequipped with capital in relation to its population and natural resources.
The rate of growth of employment and investment in such an economy lags
behind the rate of growth of population. The resources are not only employed
but also underemployed. In technical jargon, the production possibility frontier
of a poor country is far ahead of the actual production curve, whereas the gap
between the potentiality and actual utilisation of resources is narrow in a
developed economy.
3. High rate of growth of population is an important characteristic of
most of the underdeveloped economies. Population growth in underdeveloped
countries neutralises economic growth. In advanced economies, the case is
different. As Prof. Hansen points out, one of the empirical tests of secular
stagnation in advanced economies is the declining rate of population growth.
The stagnation problem in a developed economy is a problem of population,
natural resources and technology failing to keep pace with capital accumulation.
4. The central problem of underdeveloped economies is the prevalence
of mass poverty which is the cause as well as the consequence of their low
level of development. Shortage and scarcity are the main economic problems
in these economies, whereas the affluent societies of advanced countries have
economic problems resulting from abundance.
5. In an underdeveloped economy, the fundamental problem is that of
output, real income or the standard of living, as these economies are
characterised by low productivity, low income and a poor standard of living. A
vast majority of people in an underdeveloped country are ill-clothed,
8 Development and Environmental Economics
undernourished and without adequate shelter. To use Rostow's terminology,
economies of poor countries similar to those of a traditional society, where
modern science and technology are either not available or not regularly and
systematically applied. On the other hand, most of the developed countries at
present enjoy a high rate of mass-consumption. In their economies, per capita
real income has risen to a level at which a large number of people can afford
consumption transcending food, shelter and clothing.
6. Capital deficiency is the main cause of poverty of a poor country,
while affluent capital accumulation is the main cause of stagnation of an
advanced country.
7. In an underdeveloped economy, the problem of under-employment is
more important than that of unemployment, whereas a developed economy
may have a cyclical unemployment problem. There is chronic unemployment
in an underdeveloped economy. An advanced economy may have
unemployment occasionally due to business fluctuations and a low marginal
propensity to consume. Whereas an under developed economy is confronted
with the problem of disguised unemployment in the sense that even with
unchanged techniques in agriculture could be removed without reducing
agricultural output. Thus, in a developed economy, unemployment means waste
of resources, while in an underdeveloped economy, it is of disguised type.
8. Poor countries are poor in technology, advanced countries are advanced
in technology. In fact, the level of technology attained in production is a reliable
indication of the level of economic development. Employment of advanced
technology goes along with large capital resources, high attainments in the
fields of scientific research, greater availability of entrepreneurial skill and a
good supply of efficient skilled labour. Thus, development of technology is the
basic objective of the backward economy whereas development of technology
no longer remains the overriding objective of an affluent society.
Economic Development and Economic Growth
Normally in economic textbooks, growth and development are used
synonymously, and this usage is widely acceptable. However, in particular, the
two terms have been distinguished by different economists as follows;
1. To some economists, economic development refers to the process of
expansion of backward economies, while economic growth relates to that of
advanced economies.
2. Schumpeter, however, uses the term "economic development" as a
spontaneous and discontinuous change in the stationary state which disturbs
the equilibrium state previously existing. And the term "economic growth" is
used to denote a steady and gradual change in the long run which comes
through a general increase in the rate of saving and population in a dynamic
economy.
Economic Development and Growth 9
3. Prof. Kindleberger has given the differences between growth and
development as; "Growth may well imply not only more output and also more
inputs and more efficiency, i.e., an increase in output per unit of input.
Development goes beyond these to imply changes in the structure of outputs
and in the allocation of inputs by sectors. By analogy with human beings to
stress growth involves focusing on height and weight, while to emphasize
development, draws attention to the change in functional capacity in physical
coordination. For example, growth without development-more and more steel
in the Soviet Union or more and more coffee in Brazil-leads nowhere. It is
virtually impossible to contemplate development without growth because change
in function requires a change in size. Until an economy can produce a margin
above its food, through growth, it will be unable to allocate a portion of its
resources to other types of activity".
4. To some, economic development is the outcome of conscious and
deliberate efforts involved in planning. Economic growth, on the other hand,
signifies the progress of an economy under the stimulus of certain favourable
circumstances, e.g., the progress achieved by the United Kingdom during the
Industrial Revolution.
5. In his simple words, A. Maddison says, "The raising of income levels
is generally called economic growth in rich countries and in poor ones it is
called economic development". Mrs. Hicks has also expressed almost the
same views and said that economic development refers to the problems of
underdeveloped countries and economic growth to those of advanced countries
she points out that the problems of underdeveloped countries are concerned
with development of unused resources, even though their uses are well-known;
while those of advanced countries are related to growth, most of their resources
being already known and developed to a considerable extent.
6. According to Prof. Mehta, however, the term "growth" has quantitative
significance. Growth suggests an increase in the quantity or volume of
something. An increase in a country's population, national income; per capita
income, consumption, saving, investment, foreign trade etc. over a period, all
imply growth. In economics, however, growth strictly means an increase in
real income, gross and per capita. On the other hand, development is a process
of expansion, fulfilling the desire to have an increase in national income.
From the above will be clear, the distinction and interface of growth and
development.
Factors Affecting Economic Growth
The process of economic growth is a highly complex phenomenon and is
influenced by numerous and varied factors such as political, social and cultural
factors. As such economic analysis can provide only a partial explanation of
10 Development and Environmental Economics
this process. To repeat here the remark of Prof. Ragnar Nurkse in this
connection, "Economic development has much to do with human endowments,
social attitudes, political conditions and historical accidents. Capital is a
necessary but not a sufficient condition of progress". The supply of natural
resources, the growth of scientific and technological knowledge-all these too
have a strong bearing on the process of economic growth. We shall briefly
notice some of these factors one by one.
A. Economic Factors
The following are the important factors which determine the economic
growth of an economy.
1. Natural Resources
The principal factor affecting the development of an economy is the natural
resources. Among the natural resources, we generally include the land area
and the quality of the soil, forest wealth, good river system, minerals and oilresources,
good and bracing climate, etc. For economic growth, the existence
of natural resources in abundance is essential. A country deficient in natural
resources may not be in a position to develop rapidly. In fact natural resources
are a necessary condition for economic growth but not a sufficient one. Japan
and India are the two contradictory examples. As pointed out by Lewis, "other
things being equal man can make better use of rich resources than they can of
poor". In less developed countries, natural resources are unutilised, underutilised
or misutilised. This is one of the reasons of their backwardness. There is little
reason to expect natural resource development if people are indifferent to the
products or service which such resources can contribute. This is due to economic
backwardness and lack of technological factors. According to Professor Lewis,
"A country which is considered to be poor in resources may be considered
very rich in resources some later time, not merely because unknown resources
are discovered, but equally because new methods are discovered for the known
resources". Japan is one such country which is deficient in natural resources
but it is one of the advanced countries of the world because it has been able to
discover new use for limited resources.
2. Capital Formation
Among several economic factors, capital formation is another important
factor for development of an economy. Capital may be defined as the stock of
physical reproducible factors of production. Capital accumulation and capital
formation, both of these terms carry the same meaning which may be understood
simply by the stock of capital. As we know, capital formation is cumulative
and self-feeding and includes three interrelated stages; a) the existence of real
savings and rise in them; b) the existence of credit and financial institutions to
Economic Development and Growth 11
mobilise savings and to divert them in desired channels; and c) to use these
savings for investment in capital goods.
Low prospensity to save in underdeveloped countries is due to low per
capita income of the people, which may not be raised merely by voluntary
savings. Hence, the rate of per capita savings can be increased by emphasising
forced savings which will reduce consumption and thereby release savings for
capital formation. Forced savings can be possible through the implementation
of a proper fiscal policy. In this regard, taxation, deficit financing and public
borrowing are better instruments in the hands of the State to collect savings
and accumulate capital. Nurkse's suggestion to use unemployed or
underemployed rural youths in construction works has importance for capital
formation in backward economies. In addition to it, the external resources like
foreign loans and grants, and larger exports can also help these economies in
capital formation.
The capital formation possesses special significance, as it is key to
economic growth, particularly in backward economies. It increases sectoral
productivity in the economy on the one hand and enhances ultimately national
output by raising effective demand, on the other. According to Kuznets'
estimates, during modern economic growth the gross capital formation and net
capital formation was gradually between 11.13 to 20 percent and 6 to 12.14
percent in developed countries. According to Lewis, the rate in underdeveloped
countries was 5 percent or less which should be raised to the level of 12 to 15
percent.
3. Technological Progress
The technological changes are most essential in the process of economic
growth. Adam Smith, the father of political economy, pointed out the great
importance of technological progress in economic development. Ricardo
visualised the development of capitalist economies as a race between
technological progress and growth of population. The great importance of
technological progress in capitalist development was recognised by Karl Marx
too.
There is no doubt that technological progress is a very important factor in
determining the rate of economic growth. In fact, even capital accumulation is
not possible without technical progress. A country may be adding to its means
of transportation and communications, its power resources and its factories.
According to modern technique, it is called widening of capital. The use of
improved techniques in production and technological progress bring about a
significant increase in per capita income. Technological progress has something
to do with the research into the use of new and better methods of production
or the improvement of the old methods. Sometimes technical progress results
in the availability of natural resources. But generally technological progress
12 Development and Environmental Economics
results in increase in productivity, e.g., green revolution. In other words,
technological progress increases the ability to make a more effective and fruitful
use of natural and other resources for increasing production. By the use of
improved technology it is possible to have greater output from the use of given
resources or a given output can be obtained by the use of a smaller quantity of
resources.
It is a matter of common knowledge that technological progress adds
greatly to our ability to make a fuller use of the natural resources, e.g., generation
of hydro-electricity. With the aid of power - driven farm equipment a marked
increase has been brought about in agricultural yields per acre and per worker.
Technical progress also increases the ability to make a more effective use of
capital equipment. Technological progress has very close connection with capital
formation. In fact, both go hand in hand. Without capital formation technical
progress is out of the question because heavy investment is required for making
use of better and more efficient methods of production, although after they are
well established, capital cost perunit of output may fall.
Thus, technological progress has a very important role to play in the
economic development of a country. No backward country can hope to march
ahead on the road of economic development with out adopting a newer and
newer techniques of production and unless it is assisted in its march by
technological progress. We have a already brought out the importance of capital
accumulation in economic growth. But capital accumulation promotes economic
growth because it facilitates technological improvements, which raise labour
productivity and thus add to the national and percapita income.
4. Human Resources
A good quality of population is very important in determining the rate of
economic progress. Instead of a large population a small but high quality of
human race in a country is better for development. Thus, for economic growth,
investment in human capital in the form of educational and medical and such
other social schemes is very much desirable.
According to Peter Drucker : "The most important requirement of rapid
industrial growth is people. People ready to welcome the challenge of economic
change and opportunities in it. People, above all, who are dedicated to the
economic development of their country, and to high standards of honesty,
competency, knowledge and performance. What are needed beyond all else
are leadership and example, and that, only the right kind of people can provide".
Prof. Drucker stressing the significance of human capital says
further : "Capital without people is sterile, but people can move mountains
without capital. Development, therefore, requires rapid growth of human talents
and opportunities to employ them".
Economic Development and Growth 13
5. Population Growth
Labour supply comes from population growth. But the population growth
should be normal. A galloping rise in population retards economic progress.
Population growth is desirable only in a under-populated country. It is, however,
unwarranted in an overpopulated country like India. In fact, a high population
growth at the rate of 2.5 percent per annum is very much detrimental to the
economic growth of our country.
6. Social Overheads
Another important determinant of economic growth is the provision of
social overheads like schools, colleges, technical institutions, medical colleges,
hospitals and public health facilities. Such facilities make the working population
healthy, efficient and responsible. Such people can well take their country
economically forward.
7. Organisation
In the process of growth, organisation is very important. It is organisation
that emphasises maximum use of the means of production in production.
Orginisation is complementary to capital and labour and helps production to
reach the maximum level. In the modern economic system, the entrepreneur
performs the duty of an organiser and bears all risks and uncertainties. Hence,
entrepreneurship is an indispensable part in the process of economic growth.
For instance, the Industrial Revolution in England succeeded because of the
entrepreneurship.
Most of the underdeveloped countries in the world are poor not because
there is shortage of capital, weak infrastructure, unskilled labour and deficiency
of natural resources, but because of acute deficiency of entrepreneurship.
Myrdal rightly comments, "the Asian countries lack entrepreneurship not
because they are deficient in capital or raw materials but because they are
deficient in persons with right attitude for entrepreneurship". Behind Japan's
rapid economic growth there is only one reason that it has entrepreneurship in
abundance. It is, therefore, essential in LDCs to create climate for promoting
entrepreneurship by emphasising education, new researches, and scientific
and technological developments. Apart from it, the state should also give priority
to necessary imports of machines, raw materials and equipments to provide
facilities for wider markets, and to allow tax rebates, special grants and loans
to the new entrepreneurs for starting business or industries particularly in the
undeveloped areas of an economy.
8. Transformation of Traditional Agricultural Society
The transformation of traditional agricultural society into a modern industrial
society, i.e., structural changes lead to enhancement of employment opportunities,
higher labour productivity and the stock of capital, exploitation of the newly
14 Development and Environmental Economics
developed resources and improved technology. Mostly, LDCs have a very
large primary sector and very small secondary and tertiary sectors. In such
economies the structural changes involve the transfer of population from the
primary sector to the secondary and then to tertiary sectors. Agriculture being
the main occupation of the 70-80 percent population in the LDCs passes through
several structural changes. The number of dependents on agriculture sector
progressively reduce with the expansion of industrial or nonagricultural sector.
Similarly, the proportion of contribution of agriculture in the real national income
also reduces gradually. But net output in agriculture sector progressively
increases in absolute terms, as it is accompanied by a strong productivity
movement, relating to the implementation of several programmes like land
reforms, expansion of banks, improved agricultural techniques and other farm
implements, availability of better marketing facilities, means of power and
irrigation, and so on.
In LDCs the agriculture and industry become complementary to each
other. The progressively increasing productivity in agriculture enhances the
per capita real income of the people, engaged in agriculture sector. This, in
turn, expands rural demand for consumer goods and agricultural inputs which
stimulates the expansion of industrial sector, and further, it also develops
agriculture sector by providing improved farm techniques along with machines,
fertilisers and other inputs. The scope for increasing agricultural productivity
and incomes, in other words, is heavily dependent upon the structural
transformation of the economy as it affects the growth of commercial demand
for goods produced, the growth of alternative employment opportunities, and
the increased quantity of purchased inputs available to the agricultural sector".
B. Non-Economic Factors
Both of the economic or noneconomic factors do play an important role
in the process of economic growth. In this regard, socio-economic, cultural,
psychological and political factors are also equally significant as are economic
factors in economic development of the LDCs Cairncross rightly observes :
"Development is not just a matter of having plenty of money, nor is it purely an
economic phenomenon. It embraces all aspects of social behaviour; the
establishment of law and order; scrupulousness in business dealings, including
dealings with the revenue authorities; relationships between the family, literacy,
familiarity with mechanical gadgets and so on". We discuss here some of the
essential noneconomic factors which determine the economic growth of an
economy.
1. Political Factors
Political stability and strong administration are essential and helpful in
modern economic growth. It is because of political stability and strong
Economic Development and Growth 15
administration that the countries like the U.K. the U.S.A., Germany, France
and Japan have reached the level of highest economic growth in the world.
But in most of the poor countries there is political instability and weak
administration which have largely influenced their economic development
programmes. It is, therefore, essential for their faster economic development
to have a strong, efficient and incorrupt administration. In conclusion, we can
say that a clean, just and strong administration can put an economy on the way
to rapid economic development. Lewis rightly comments that "no country has
made progress without positive stimulus from intelligent governments".
2. Social and Psychological Factors
Modern economic growth process has been largely influenced by social
and psychological factors. Social factors include social attitudes, social values
and social institutions which change with the expansion of education and
transformation of culture from one society to the other. The Industrial Revolution
of England and other Western European countries in the 18th century was
largely influenced by the spirit of adventure and the expansion of education
which led to new discoveries and inventions and consequently to the rise of the
new entrepreneurs. Social attitudes, values and institutions changed. Joint family
system was replaced by the new single family system which further led to the
rapid economic development in these countries.
But the society in LDCs has been badly enveloped and guided by traditional
customs, outdated ideology, values, and obsolete attitudes which have not been
conducive to their economic development. Thus, there is need to change or
modify these social and psychological factors for the rapid economic
development in these countries. But it is not an easy task, and moreover, any
rapid change may bring discontentment and resistance in the society, with the
result that it may adversely affect the economic growth in the economies.
Only the selective social and psychological changes can lead to economic
growth in LDCs. According to the UN Report on Economic Development of
Underdeveloped Countries, it is hence impossible to speed up economic growth
in these economies without painful adjustments. It, thus, advises to adopt an
evolutionary change in social and cultural factors rather than revolutionary
ones. Myrdal in his book Asian Drama also advocates the adoption of
"modernisation values" or "modernisation ideals" for the rapid economic
development of underdeveloped countries.
3. Education
It is now fairly recognised that education is the main vehicle of
development. Greater progress has been achieved in those countries, where
education is wide spread. J.K. Garlbraith in his book "Economic Development"
has rightly stressed the role of education as an engine of economic growth.
16 Development and Environmental Economics
4. Urbanisation
Another noneconomic factor promoting development is the process of
urbanisation. In poor agrarian economies, the structural change must begin
with the change in the size of population in rural and urban sectors.
5. Religious Factors
Religion plays a great role in economic growth. It may give rise to a
peculiar sense of self-satisfaction. For example, the Hindu religion encourages
faith in fate and prevents people from working hard. They are educated to
remain satisfied with their lot and to hate risk and enterprise. Then our religion
gives a higher place to spirit than matter.
In short economic growth is the result of concerted efforts of both
economic and non economic factors. However, the mere presence of one or
more or all of these factors may not ensure that the economy will be in a
position to generate forces that bring about a fast economic growth. Some
further factors may also be required that may work as a catalyst for growth.
This function can well be performed by the state.
Obstacles to Economic Development
Broadly speaking, the features of an under developed economy create
obstacles in the way of economic development, and hamper economic progress.
These features emerge out of economic, social, political, religious and institutional
factors. It would be wrong to conclude that only economic factors are responsible
for poverty or economic backwardness of a country. Non-economic factors
are equally responsible for the under development of an economy. The factors
discouraging economic development may be classified into economic and noneconomic
factors which are as under.
Obstacles to Economic Development
Economic Factors Non-Economic Factors
1. Vicious Circle of Poverty 1. Undeveloped Human Resources
2. Deficiency of Capital 2. Political Instability.
3. Market Imperfections 3. Socio-cultural Constraints
4. International Forces 4. Religious Factors
5. Difficulty of Adoption
Western Technology
6. Low Agricultural Productivity
7. Lack of Entrepreneurs
Economic Development and Growth 17
Now we discuss these factors in detail.
A. Economic Factors
The important economic factors which obstacles to economic development
are:
1. Vicious Circles of Poverty
Most important feature of underdeveloped countries is their dependence
on vicious circles of poverty which may be considered as the highest bottleneck
in the process of their economic development. Poverty is not only distressing
but it is also demoralising. A poor man is one who is regarded as a disgrace to
the society and a cause of humiliation to himself, and who is unable to have
proper food and a suitable house. Neither he helps himself, nor he is able to
serve others. He is burden on society. A poor man always finds himself having
been caught in a vicious circle of poverty. Since he lacks the means to prosper,
he remains poor.
What is true to an individual, is also true to the country as a whole.
Since an underdeveloped economy lacks the proper and modern means of
economic development, its economic development becomes an uphill task.
Since its rate of investment and growth potential is so little, it has to remain
poor.
We find circular relationships, known as the "vicious circles of poverty"
which reveal the low level of economic development in Less Developed
Countries (LDCs). Prof. Nurkse defines the concept of "Vicious Circles of
Poverty" in these words: "It implies a circular constellation of forces tending to
act and react upon one another in such a way, as to keep a poor country in a
state of poverty.... A country is poor because it is poor."
The vicious circles operate in an underdeveloped economy on the supply
as well as on the demand side. On the supply side deficiency of capital and low
volume of savings, create vicious circles whereas low purchasing power creates
vicious circle on the demand side.
Now we discuss how does vicious circle of poverty operate on the
supply side? Poverty is responsible for the low level of income which in turn
leads to low volume of savings. It results in deficiency of capital and low
productivity. Low productivity is the cause of low level of income. The circle
starts with poverty and ends with the low level of income and in this way the
vicious circle is complete. Diagrammatic representation of the circle is given
below. (fig-01)
18 Development and Environmental Economics
Vicious Circle of Poverty
(Supply Aspect)
Fig. 1
Poverty
or
Low Income
Low
Productivity Low Saving
Low Capital
Formation Low Investment
Vicious Circle of Poverty
(Demand Aspect)
Fig. 2
Low
Productivity
Low Level of Capital Low
Inducement
to invest
Small extent
of the market
Just as vicious circle of poverty operates on the supply side, similarly it
also operates on the demand side. Again, poverty or low income is the starting
point. Low level of income results in low purchasing power and low level of
demand. It limits the extent of market, which in turn leads to low investment
resulting in low capital formation and low productivity, which is the cause of
poverty and low income. In this way the circle completes its round and continues
rotating along the fixed path. This phenomenon has explained with fig-02.
Poverty
or
Low Income
Ragnar Nurkse has explained the operation of vicious circles in the
words. "The inducement to invest may be low because of the small purchasing
power of the people, which is due to their small real income which again is due
to low productivity. The low level of productivityis however, the result of the
small amount of capital used in production, which in turn may be caused, at
least partly, by small inducement to invest".
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